The return of Hayek

I’m glad that Adam Davidson is drawing attention to one of Paul Ryan’s two economic gurus, Friedrich von Hayek (the other being Ayn Rand). It’s a clear demonstration, as I explained to students yesterday, that ideas that were once quite peripheral have become mainstream.

Back last December, I asked two questions: why the resurgence of interest in Austrian economics, and why now? Here’s my provisional answer:

I certainly don’t have a complete analysis of why this is the case but I can offer a couple of possible reasons. One is that mainstream economics has failed. By mainstream economics I mean the versions of neoclassical theory that students are taught and that serve as the backbone of much of the research that takes place in the leading graduate programs in economics. Austrian economics shares a celebration of free markets with neoclassical theory but it stands somewhat apart, with a different set of methodologies and concepts. In other words, it’s a different way of making the case for free capitalist markets after the failure of existing—Samuelsonian, for short—approaches to neoclassical economics.

A second reason is that the legitimacy of capitalism is currently being called into question, just as it was during the First Great Depression, when Austrian economics had its first heyday. It was then eclipsed by the Golden Age of capitalism in the postwar period but now it seems to be back with a vengeance. So, not only has mainstream economics failed; capitalism itself has failed. And Austrian economics may just be a last, desperate attempt to argue that the 1 percent—with their obscene riches and tremendous power—have a legitimate place in this society.

I would add to that (at the suggestion of one commentator), the role of “careful marketing and loads of money”—not only of the Koch brothers but also of the determined efforts of the Mont Pelerin Society.

It remains to be seen whether the new Hayekians like Paul Ryan actually read the work of their guru, especially on issues like healthcare.

And I do need to pick a bone with Davidson, who really shouldn’t get away with asserting that “For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics.”

Sorry, Adam, but that’s just a poor rendering of the history of economic thought. While neoclassical theory has changed over the course of the past 100 years, there are plenty of economic theories that represent radical criticisms of and departures from neoclassical theory. Yes, it may be true that Austrian economics was part of neoclassical economics at the very beginning and then broke away but many of the other theories in economics that have gained currency in the last century and this one are simply not grounded in neoclassical theory. I’m thinking not only of the Marxian critique of political economy (which of course preceded the emergence of neoclassical theory) but also of many other heterodox approaches to economics: Keynes, classical (especially in the work of Piero Sraffa), Post Keynesian, radical, institutionalist, feminist, postcolonial, ecological, and so on.

None of them “emerged from a broad tradition known as neoclassical economics.” Instead, each of them represents a rejection of neoclassical theory, or at least one or another key assumption of the kind of economics practiced by neoclassical economists. And all of them can take solace from the fact that economic ideas that were once peripheral have, as conditions change, generated renewed interest—even if they never become mainstream.